Over the past year financial media has been exclusively focused on the performance of the “Magnificent Seven.” While their impressive growth is undeniable, it’s natural to wonder if diversification across different asset classes and regions might be a prudent next step.
Several factors support this consideration. Firstly, the once-uniformly strong performance of the “Magnificent Seven” has shown signs of divergence, with some companies like Apple facing challenges in 2024. Secondly, the market is experiencing broader participation, suggesting a more robust overall economic picture. Finally, international markets are showing strength, with several indices reaching new highs and numerous companies outside the U.S. performing well. This highlights the potential for missed opportunities if investments remain solely focused on U.S. companies.
The U.S. isn’t the only market celebrating record highs. Over the past year, Japan, Germany, and France all achieved impressive milestones: Japan’s Nikkei 225 reached its highest point in 34 years, and European markets surpassed their previous peak from January 2022. This positive trend in Europe and Japan coincides with the return of inflation and positive interest rates, which are seen as a positive sign for these economies.
Beyond the impressive returns of the “Magnificent Seven,” international markets are also brimming with opportunities. Notably, 32 of the top 50 best-performing companies globally so far this year are international. In Europe, the “Granolas,” identified by Goldman Sachs in 2020, represent a broader segment of the market compared to the U.S.-focused and tech-heavy “Magnificent Seven.” These eleven European companies not only boast significant value but also share characteristics like consistent growth, low volatility, healthy profit margins, strong financial health, and reliable dividends.
Here is a breakdown of the “Granolas”: GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH Moet Hennessy Louis Vuitton, AstraZeneca, SAP, and Sanofi. Out of these eleven names, Cardinal’s Non-U.S. equity portfolio holds six of these companies.
Similar to the U.S. “Magnificent Seven,” the European “Granolas” have been a powerful force in their market. According to Goldman Sachs analysts, these companies contributed significantly to European stock market growth, accounting for 60% of all gains over the past year. Notably, Novo Nordisk, a leading European company and one of our long-held investments, exemplifies this success. This Danish pharmaceutical giant has seen its earnings surge thanks to its popular obesity drug, Ozempic.
The “Granolas” encompass a wider range of industries, including healthcare, consumer staples, and consumer cyclicals, offering a more diverse portfolio compared to the tech heavy “Magnificent Seven”. Several “Granola” companies are global leaders in their fields like Nestle in the food sector, which is another of our long-standing investments.
“Granola” stocks have delivered strong returns to investors, comparable to their U.S. counterparts. While the “Granolas” are on average smaller companies, they offer broader diversification than the “Magnificent Seven”. Their high profitability justifies their higher valuations compared to the rest of the market. However, since the U.S. companies are even more profitable, it explains why the European “Granolas” trade at a discount.
While the “Magnificent Seven” have captured significant attention, it’s crucial to consider the importance of diversification across various asset classes and regions. One approach to achieve this is by incorporating small-cap companies into your portfolio. Cardinal Capital’s small cap equity portfolio is specifically designed to invest in high-quality small-cap companies with attractive valuations. Notably, Cardinal’s expertise in this area was recently recognized by Zephyr’s PSN database, awarding them the prestigious PSN Top Guns Small Cap Manager of the Decade designation. This distinction highlights Cardinal’s consistent ability to deliver superior risk-adjusted returns for their small-cap portfolio over a ten-year period.
While the “Magnificent Seven” have been a force to be reckoned with, the investment landscape is constantly evolving. By diversifying your portfolio across different asset classes and regions, you can potentially mitigate risk and capture opportunities beyond the U.S. market. International markets are experiencing strong growth, and companies like the European “Granolas” offer compelling investment possibilities.
Please contact us to discuss how diversification can help you achieve a more robust and well-rounded portfolio.